Sanctions Raise Russia Bank Risk; Direct Exposure Limited

Fitch-rated Russian banks appear able to absorb potential credit losses from their exposure to individuals and companies targeted by US sanctions announced on 6 April. Most rated banks do not have material exposure, and those that do appear to have collateral or sufficient pre-impairment profitability to cover potential losses. We therefore do not expect any immediate rating impact. However, if banks continue to transact with the named individuals or companies, they themselves may face further sanctions.

The US Treasury sanctioned several Russian businessmen and the companies they own or control, adding them to its list of Specially Designated Nationals and Blocked Persons (SDNs) and freezing their US assets. US citizens will be prohibited from dealing with them and must terminate existing contracts by 5 June and divest debt and equity holdings by 7 May.

The sanctions are credit negative for the affected companies, even if the Russian government provides support. The companies are likely to lose some contracts and funding access, and their weakened credit profiles will increase the credit risk for banks that lend to them.

Among Fitch-rated banks, Sberbank's total exposure to SDNs (including defence companies added to the list last year) is about USD11 billion (2.5% of assets or 20% of equity). Loans to defence companies may be transferred to Promsvyazbank, reducing the overall exposure. Of the remainder, a large part relates to aluminium company Rusal, with credit risk mitigated by the pledge of Norilsk Nickel's shares, as per the company's disclosure.

Vnesheconombank's (VEB) exposure to new SDNs is also material relative to its equity. Credit Bank of Moscow (CBOM) and Sovcombank have moderate exposure to new SDNs, at 1.0%-1.5% of assets, or about 10% of equity.

Exposures were originated before the introduction of the latest US sanctions. Selling or unwinding them may be difficult without significant losses, or even impossible. If they remain on banks' balance sheets, they may need to be restructured with extra provisioning.

However, pre-impairment profit at Sberbank (2017: USD19 billion), CBOM and Sovcombank is robust and should cover risks from these exposures, while VEB may receive government support, if needed. Other large and Eurobond-issuing banks rated by Fitch in Russia (Gazprombank, Russian Agricultural Bank, Alfa, Tinkoff, Citi, Rosbank, UniCredit and Raiffeisen) have non-material or no exposure to new SDNs, relative to their equity.

Any banks that engage in significant transactions with SDNs could face extra sanctions, although it is not clear what these might be. State-owned banks are already under sanctions preventing US investors from engaging in long-term financial transactions with them.

When certain defence companies were added to the SDN list last year, the Russian authorities advised banks to transfer their exposures to the recently rescued Promsvyazbank, to limit contagion risk. Such transfers are reportedly being discussed by Sberbank, VTB and Alfa Bank. We believe the authorities may propose a similar approach regarding the companies added to the list on 6 April. A transfer of exposures at book value would reduce banks' credit risk, although there has been no indication that this approach would be taken. Without state support, it could be difficult for banks to sell or unwind their SDN exposures, as there is no active market for such assets.

The rouble fell 12% last week (but has recovered moderately this week). The impact on most banks' risk-weighted assets and capitalisation will be moderate, as only 20% of sector loans are in foreign currency. Our preliminary analysis suggests that a USD/RUB rate above 70 (currently 61-62) could be challenging for some bigger banks, but we think that in such a scenario the Central Bank of Russia might give forbearance on regulatory capital calculations, as it did in 2014.